Starbucks

Presented by:
Adam Berger, Justin Buchman,
Donald Chase & Suzana Hsu

THE FRAPPUCCINOS
 Presentation Outline
 Introduction to Starbucks
 Industry Overview
 Company Overview
 Site Analysis
 Recommendations for Improvement
 Focused Recommendation for Improvement
 Final Action Plan
 Impact Analysis
 Wrap Up

The Frappuccinos
 Introduction to Starbucks
 Company started in 1971 in Seattle,
Washington
 Grew from 55 stores in 1989 to over 2,200
stores today
 Products sold include:
- beverages - pastries
- whole coffee beans - coffee-related retail items

The Frappuccinos
Industry Overview

The Frappuccinos
 Industry Definition
 Specialty Eatery Industry
– Fits within the largest segment of disposable
income spending -- food and beverages
– Steady growth in this segment in the 1990’s has
led to an abundant number of new companies
– As demand for convenience has made eating
out a normal routine, the demand for specialty
food services has increased in recent years

The Frappuccinos
 Industry and Competitive
Analysis
 Market Structure
– Monopolistic Competition
 Competitive Activity
– Many companies are in the market and competition is fierce
– Competitors use location, product mix, and store atmosphere
differentiation to establish market niche
 Industry Costs and Capital Structure
– Low to moderate costs for each location
– Major start-up expenditures are property and equipment
– Major operating costs are labor and cost of sales

The Frappuccinos
 Industry PEST Analysis
 Political Influences
– Relationships between coffee producing nations and US
– State & Local government controls
 Economic Influences
– Constant demand for food and beverages
– Changes in disposable income could influence purchase levels
 Social Influences
– Consumer preferences could shift from coffee to other beverages
 Technological Influences
– Use of technology can improve operational efficiencies

The Frappuccinos
Company Overview

The Frappuccinos
 Starbucks Corporate Strategy
 Maximize market penetration
 Provide a relaxing, attractive social
atmosphere
 Offer high-quality products

 Create a great working environment

 Achieve profitability

The Frappuccinos
 Starbucks SWOT Analysis
 Strengths
– Largest market share in industry
– Differentiated atmosphere
 Weaknesses
– Aggressive expansion could lead to managerial / financial problems
 Opportunities
– Whole bean sales in supermarkets
 Threats
– Lack of ownership of coffee farms can lead to price fluctuations

The Frappuccinos
 Company Financial
Performance (1998 FY)
 Revenues $1,308.7 million (% of Sales)
 Gross Margin 195.7 million 15%
 Pre-tax Profit Margin 116.4 million 8.9%
 Net Income 68.4 million 5.2%
 Return-on-Assets 8.7%
 Return-on-Equity 11.0%
 Debt-to-Equity 0.04
 12 mo. Revenue Growth 28.4%

The Frappuccinos
 Company Financial
Performance (1998 FY)
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
Net Profit ROE ROA Debt/Equ 12-Mo Rev
Margin Growth
Industry Starbucks

The Frappuccinos
Site Analysis

The Frappuccinos
 Site Characteristics
 Leased store located on Central Street in Wellesley
 Store has over 1,000 square feet of retail space and
1,000 square feet of office and storage space in the
basement
 Second most profitable store in the fourteen store
region
 Located one block away from Commuter Rail train
station and in busy retail shopping area
 Only one direct competitor (Au Bon Pain) in the area

The Frappuccinos
 Site’s Operational Results
(1998 FYTD – 11 Months)
 Financial Operations
1998 1997 %
Total Sales $760,576 $796,688 (4.5%)
COGS 242,593 262, 945 (7.7%)
C/M 517,983 533,743 (3.0%)
Fixed Exp. 367,746 431,923 (14.9%)
EBIT $150,237 $101,820 47.6%

– No money spent on independent advertisement

– Local entertainment budget underutilized

The Frappuccinos
 Volume of Sales vs. Contribution Margin %

$300,000 100.0%

90.0%

$250,000
80.0%

70.0%
$200,000

60.0%

$150,000 50.0%

40.0%

$100,000
30.0%

20.0%
$50,000

10.0%

$0 0.0%
Espresso Whole Drip Coffee Pastries Blended Other Serveware Packaged Media Brewing
Drinks Beans Beverages Beverages Food/Tea Equipment

The Frappuccinos
Dollar Volume Sold Product Contribution Margin %
Site 7-S Analysis

The Frappuccinos
 Site 7-S Analysis
 Strategy
– Store’s strategy is to create a comfortable Third
Place environment
– Serve customer a customized high-quality product
– Achieve high level of profitability by focusing on
high-margin items while generating add-on sales
– Minimize overall expenses by focusing on
controllable expenses

The Frappuccinos
 Site 7-S Analysis
 Structure S to re M a n a g e r
– Functional in structure
and relatively flat
A s s is t a n t M a n a g e r
– Corporate organization
is tall with four levels
of management above S h ift S u p e r v is o r s
store management

B a r is t a s B a r is t a s B a r is t a s

The Frappuccinos
 Site 7-S Analysis
 Staffing
– Location has one manager, an assistant manager and 16
partners
– Benefits package includes health, dental, and vision care,
stock options, free shift drinks, and a free pound of
coffee each week
– Raises are based on semi-annual performance
evaluations with raises ranging from 0-5%
– Bonuses are not utilized, but the location has given away
non monetary rewards

The Frappuccinos
 Site 7-S Analysis
 Systems
– Corporate headquarters exercises controls over
individual sites
– Total Quality Management is specifically built into
their processes
– Utilizes a large amount of information technology
(IT)
– Internal controls for the store are determined by
the manager based in part on information
provided by the IT system

The Frappuccinos
 The use of IT at Starbucks

Sales, Inventory,
Inventory, Individual Individual Orders,
Staffing Stores Stores Transfers

Sales,
Inventory, Individual
Corporate IT Vendors,
Orders, Budgets,
Staffing Stores System Distributors,
Future Sales
Mgmt.,
Channel
Members

The Frappuccinos
 Site 7-S Analysis
 Skills
– Most important skills include “people skills” and
drink preparation ability
– Partners receive training to learn about products,
brewing methods, and sales techniques
– Retraining mainly occurs during new product roll-
outs, although this site does not use regular
meetings, but instead one-to-one discourse

The Frappuccinos
 Order Cycle Times
Yes
.53 Min
Yes
Pastry?

No
Take .53 Min
Bottleneck
Customer’s
Order?
Order
Yes
.40 Min

No
Pastry?

No
.27 Min
Bottleneck Capacity 114 / Hr
The Frappuccinos
 Site 7-S Analysis
 Style
– Basic management style is Laissez Faire
– Management motivates through reviews and
raises
– Work duties are assigned by shift supervisors
– Employees are allowed to use initiative and
empowered to make decisions

The Frappuccinos
 Site 7-S Analysis
 Shared Values (from Mission Statement)
– Provide a great work environment
– Treat each other with respect and dignity
– Embrace diversity
– Apply the highest quality standards for products
– Develop enthusiastically satisfied customers
– Contribute to the community and environment
– Recognize that profitability is essential to future
success

The Frappuccinos
 Alignment of Store with
Corporate Strategy
 Contrary to the mission statement focus, the
reduction of staffing levels appears to be more
important than developing satisfied customers
 The relevance of the benefits package is
misaligned considering the average age of
employees
 The high turnover rate of partners and managers
is detrimental to customer environment

The Frappuccinos
Recommendations

The Frappuccinos
 Recommendations For
Improvement
1. Revamp the employee reward system

2. Tighten focus on creating the “Third

Place” environment

3. Focus profitability measures on profitable

sales, not just reduction in staffing

The Frappuccinos
 Revamp Employee Reward
System
 Large percentage of the staff are under the
age of twenty
 Benefits package focuses on medical,
dental, and vision care, as well as the
employee stock options
 Outside of hourly wage, and semiannual
raises, there are few monetary rewards

The Frappuccinos
 Improve “Third Place”
Environment
 Site has a very high employee turnover rate
 Manager “promoted” to a another store in
hopes of improving their poor performance
 Site has very poor handicapped accessibility

 Condition of restroom in each of our visits

was poor and had no baby changing area

The Frappuccinos
 Focus Profitability Measures
on More Than Just Staffing
 Store is underperforming on some high margin
product segments
 Too high a focus on minimizing direct labor as
a key to achieve profitability
 Focus on high-margin items and profitable
add-on sales
 By increasing pastry sales by 33%, store
would realize a $16K increase in contribution

The Frappuccinos
 Focused Recommendation

Improve “Third Place”

Environment

The Frappuccinos
 Pros and Cons of Discounted
Opportunities
Revamp the Employee Reward System
Pros Cons
– Employees are motivated – Pay and benefit structures
with more incentive to dictated by corporate HQ
perform – Cost of benefits would
– Lower employee turnover additional benefits lower
rates site profitability
– Positive reinforcement – New reward system requires
which leads to higher additional management
feelings of job satisfaction

The Frappuccinos
 Pros and Cons of Discounted
Opportunities (Cont.)
Focus Profitability Measures on More Than Just Staffing

Pros Cons
– Higher staffing levels – Staffing is a cost that will
benefit other employees decrease profitability
– Better customer service – Upper-level management
– Improved customer perception of low
focus could lead to employee productivity
higher sales – Employees may get in
each other’s way
The Frappuccinos
 Three-Step Action Plan For
Improvement
 Decrease employee turnover rate
– Focus on hiring older employees where benefits
package is more appropriate
– Base raises on performance rather than
maximizing raises for economic reasons
– Develop and actively maintain a reward system
for employees (i.e. employee of the month)
– Develop a system of regular employee
communications / meetings

The Frappuccinos
 Action Plan (cont.)
 Improve site accessibility and cleanliness
– Upgrade front door and restrooms for
handicapped accessibility
– Add a baby changing station
– Redesign restroom to separate cleaning supplies
from bathroom or move cleaning supplies to
another location
– Focus employee attention on restroom
cleanliness

The Frappuccinos
 Action Plan (cont.)
 Enhance Starbuck’s differentiated
atmosphere
– Utilize entertainment budget to hire outside
entertainers, have book / poetry readings, etc.
– Display the store’s collection of games and
activities more prominently
– Make the location more of a “scene”

The Frappuccinos
 Impact Analysis - Benefits
 By focusing on the initial recruitment and
hiring stage, and by rewarding employees
based on merit current turnover rates will be
reduced.
 By focusing on site accessibility and
cleanliness, the physical facility will not
detract from atmosphere.
 By improving Starbucks’ atmosphere, it will
become a more attractive place to go.

The Frappuccinos
 Potential Risks
 Customers may not react positively to the
changes being made
 Not enough available employees to meet re-
aligned hiring needs
 Claims of age discrimination and negative
affect on sales in youth demographic
 Costs associated with planned change

The Frappuccinos
 Wrap-Up
 Starbucks is the market leader in a growing
market segment
 Starbucks is known world-wide for its high-
quality food products and differentiated
“Third Place” atmosphere
 The Wellesley location embodies the ideals
of the corporate mission and has been very
profitable, but there are still opportunities for
improvement
The Frappuccinos
Conclusion / Questions

The Frappuccinos